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    FAER~211 i'FINANCIi).L CONSTMINTS TO TMDE' ANI} GROWTll. -Tlll.! ,'~~~~~ 'PElEl,~l CRISIS ,AND ITS AFTERMl'!TlI; (FOREIGN AGRICULTUML ECO,,!OMIC REP-r.) I $I 'I

    .' D. SHANE, ET AL . ECONOMIC RESEARCH SERVICE, WASHINGTON, pC~ INTE RNi).TIONAL ECONOMICS DIV. ,DEC A4 ,qp

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    Financial Constraints to Trade and Growth The World Debt Crisis and Its Aftermath

    (u.s.) Economic Research Service, Washington, DC

    Dec 84

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  • 50272-1011 REPORT DOCUMENTATION 11. REPORT NO.

    PAGE FAER-2ll 1~ 3. Recipient's ACCflslon No. TItle end Subtitle .~~g 5 r 59 er2'f&$

    Financial Constraints to Trade and Growth: TIle World 5. Re.port DateDept Crisis and its Aftermath Decp.mhp.T 1994

    s.7. Author(s) Mathew D. Shane and David Stallings L Performi.. Orpnlzatlon Rept. No.9. Performl.,. Orpnlzetlon Nemo end Add,"s FAER-?11

    International Economics Division .. .. 10. #"rv/eetlTesklWorlc Unit No.

    Eca'nomic Research ServiceU.S. Department of Agriculture

    u. Contreet(C) or Grent(G) No.washington;I5;C:-20250~ . (C)

    1~ Sponsorinl Orpnlutlon Neme !'Ind Add,...

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    13. Type of Report & Period Covered

    14. 15. Supplementery Not..

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    16. Abstract (Umit: 200 _rdl)

    The debt problems of developing coootries will severely limit their abUity to purchase goods inthe world market for at least the nerc 5 years. Resolutions of these debt problems couldincrease potential U.S. agrlccttural exports by as much as 20 percent. The large debts of thedeveloping C01.mtries became serious problems with the shifts to tighter mOnetary policies by the-developed countries in the late seventies Cl'1th:onsequehl.. stuwirrgvt1nfla-ttonatiu-creCiitfiows.Eighteen countries which are major markets for U.S. agriculture hold more than 60 percent ofthe problem debt. Both current debts and national economic policies in the developing countriesmust be restructured to begin the ~trengthening of those countries' economies. Developedcountries can help the economic recovery of developing nations by providing markets for theirexport commodities.

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    17. Ooc:ument Anlpls e. DftCriptO,.International trade Foreign TradeExports

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    Surveys b. Identlfle,.IOpenEnded Terms

    International dept Financial constraints to trade

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    Fiche: $4.50

    c. COSATi F1eld/Graup Cost codes are:fjp3 for Paper02-B; OS-C

    lL Avellebility StIItemllln: and AOl for Fiche

    National Technical Information Service It. hcurfty Cle.. (TIll. Report) 21. No. of Peles5285 Port Royal Road, Springfield, VA 22161

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    a. Securfty Cln. (Thl. Pap) 22. Price.

    (Se. ANS1-Z39.11) Unclassified See box 17OPTIONAl. FO11M 272

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    FINANCIAL CONSTRAINTS TO TRADE AND GROWTH: THE WORLD DEBT CRISIS AND ITS AFTERMATH, by Mathew D. Shane and David Stallings, International Economics Division, Economic Research Service, U.S. Department of Agriculture, Foreign Agricultural Economic Report No. 211.

    ABSTRACT

    The debt problems of developing countries will severely limit their ability to purchase goods in the world market for at least the next :s years. Resolutions of these debt problems could increase potential U.S. agricultural exports by as much as 20 ;Iercent. The large debts of the developing countries became serious problems wi.th the shift w tighter monetary policies by the developed countries in the late seventies and consequent slowing of inflation and credit flows. Eighteen countries which are major markets for U.S. agriculture hold more than 60 percent of the problem debt. Both current debts and national economic policies in the developing countries must be restructured to begin the strengthen~.ng of those countries' economies. Developed countri'es can help the economic recovery of devel0ping nations by providing markets for their export commodities.

    Keywords: Intern;J.tiona,l debt, trade, growth, financial constraints to trade, developing countries, U.S. agricultural exports, U.S. agricultural trade policy.

    Acknowledgment: The authors would like to acknowledge the considerable help and encouragement of Lon Cesal in the course of this work. We also acknowledge the valuable comments and suggestions of Vernon Roningen, Cecil Davison, Tom Vollrath of the Division and Robert Thompson, Terry Roe, and Phil Abbott in the profession. The valuable assistance of Daniel Conneen in carrying out the data analysis is further noted. The authors retain responsibility for any remaining errors. We also want to thank Jamesena George who typed the manuscript.

    PREFACE

    Congress will consider new farm legislation in 1985 to replace the expiring Agriculture and Food Act of 1981. In preparation for these deliberations, the Department of Agriculture and man~r groups throughout the Nation are studying the expftrience under the 1981 law and preceding legislation to see what lessons can be learned that are applicable to the 1980s. This report is part of a series of background papers for 1985 farm bill discussions. Other papers in the series explore the characteristics of 14 commodities, the farm industries which produce them, and the farm program.... under which they are produced. These papers, availa.ble from EMS Information, 1470-S, USDA, Washington, DC 20250, (202/447-7255), focus on Honey (AIB-465), Wool and Mohair (AIB-466), Wheat (AIB-467), Tobacco (AIB-468), Peanuts (AIB-469), Rice (AIB-470), Corn (AIB-471), Soybeans (AIB-472), Oats (AIB-473), Dairy (AIB-474), Sorghum (AIB-475), Cotton (AIB-476), Barley (AIB-477), and Sugar (AIB-478). Other background papers available are Federal Credit Programs for Agriculture (AIB-483), History of Agricultural Price-Support and Adjustment Programs, 1933-84 (AIB-485), Foreign Exchange Constraints to Trade and Development (FAER-209), Possible Economic Consequences of Reverting to Permanent Legislation or Eliminating Price and Income Supports (AER-526), and Impacts of Policy on U.S. Agricultural Trade (ERS Staff Report No. AGES840802).

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    WASHINGTON, DC 20250 DECEMBER 1984

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  • CONTENTS

    LIST OF FIGURES ........ ..... .......... .......... ...... ............... ......... ..................... ...................... iii

    SUMMARY .................................................................................................................... v

    INTRODUCTION .,.......................................................................................................... 1

    BACKGROUND: FACTORS UNDERLYING THE GROWTH IN WORLD DEBT .................... 2

    Monetary Policy in the Developed Countries ................................ "............................ 3 Interest Rates ......................................................................................................... 3 The Foreign Exchange Value of the Dollar ........ ,......................................................... 5 Current Account Deficits ......................................................................................... 7 Government Financing ............................................................................................. 10 Inflation ................................................................................................................. 10 Terms-of-Trade ...................................................................................................... 10

    DEBT RESCHEDULING: SYMPTOMS OF WORLD DEBT PROBLEMS ................................ 12

    TRENDS IN DEBT ACCUMULATION, COMPOSITION, AND RATIOS ........................... ,..... 16

    WORLD DEBT IN THE FUTURE ..................................................................... "................ 19

    THE EFFECTS OF WORLD DEBT ON U.S. AGRICULTURAL EXPORT PROSPECTS ........... 20

    THE U.S. RESPONSE: HOW TO MINIMIZE OUR COSTS ................................................... 27

    Dampening of Growth and Trade ............................................................................... 27 The Need for Adjustment ......................................................................................... 27 Financial Restructuring ........................................................................................... 28 Restructuring and Protectionism .............................................................................. 28 FinanCing and Adjustment ....................................................................................... " 28 Financing and U.S. Exports ....................................................................................... 28 Financing and. Repayment ....................................................................................... " 28

    BIBLIOGRAPHY ............................................................................................................. 29

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    U.S. AGRICULTURAL EXPORTS AND EXPORT PROJECTIONS, 1979-81 MARKET SHARE

    47 All Developing Countries and Major Borrowers ....